Production Decisions Under Bottleneck Operations Health Kick Cereal Company manu

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Production Decisions Under Bottleneck Operations
Health Kick Cereal Company manufactures breakfast cereals. In response to consumer demand, the company wants
to begin producing gluten-free cereals. In order to do this the company will have to separate the production of
gluten-free cereals from other cereals.  

As part of the production process, finished cereal must be loaded into the appropriate sized bags utilizing a
packaging machine. With the cost of packaging machines at an all time high, and in light of the fact that the
machine used for packagin gluten-free cereal cannot be used for any other product, the company is only
willing to commit one packaging machine to be used in the gluten-free cereals. Based upon current union
negotiation, the company is only allowed to run each packaging machine for a total of 12 hours daily - this
provides a total of 43,200 seconds of processing time daily.     The total daily fixed cost of the
gluten-free cereal production is $          3,000 .
Marketing research indicates customers demanding gluten-free cereal will purchase boxes in the following sizes:
a 10 ounce box; a 20 ounce box; and a 40 ounce box. Research also indicates that the company can sell as many
boxes as it can manufacture in a day. Since the marketing information did not indicate whether customers
prefer more of one bag size over another, the company plans to maximize production time of the dedicated
packaging machine, utilizing all available 43,200 machine seconds each day, which will create a bottleneck  
in the packaging process.
Using the information above and the additonal data below, complete assignments number 1 - 5 below.
Additional Data:
                                                          10oz bag 20oz bag 40oz bag
Unit selling price                                  $ 6           $10             $18
Unit variable cost                                 $ 4           $ 7              $ 13
Unit contribution margin                      $ 2           $ 3               $ 5
Packaging machine seconds per bag 5              5                  10

Since the unit contribution margin per bag produced is highest for the 40 oz bag, the company plans to go with  
the following level of daily production:
Budgeted daily production of bags                  200                    400           4,020

1 What is the total daily net income the company will earn on gluten-free cereal if they manufacture the planned
quantity of bags per day for each size?

2 Calculate the unit contribution margin per production bottleneck operating second for each bag.

3 Based upon your calculation above, which size bag should the company focus on producing?

4 Keeping in mind the fact that the packaging machine is limited to running a total of 43,200 machine
seconds per day, calculate the amount of daily net income the company would earn in each instance if it
decided to produce only 1 size bag of gluten-free cereal:

5 If the stores that are willing to sell the company's gluten-free cereal insist that all 3 sizes must be stocked to
include a daily minimum of at least 500 bags in each size:
a. What is the optimal number of bags for each of the 3 sizes to produce daily?
b. What is the amount of daily net income the optimal production mix you chose above will provide?
c. Would the total daily net income increase or decrease if the company decided, instead, to make:
               500 - 10 oz bags
           1,000 - 40 oz bags
Which would limit the number of 20 oz bags that could be produced to :

Explanation / Answer

10 Oz 20 Oz 40 Oz Total 1 Unit selling price 6 10 18 Unit Variable cost 4 7 13 Unit contribution Margin 2 3 5 Packaging Machine per bag 5 5 10 Planned units 200 400 4020 400 1200 20100 21700 Fixed cost 3000 Net Income 18700 2 10 Oz 20 Oz 40 Oz Total Unit selling price 6 10 18 Unit Variable cost 4 7 13 Unit contribution Margin 2 3 5 Packaging Machine per bag 5 5 10 contribution margin per production bottleneck 0.4 0.6 0.5 3 Company should focus on 20 Oz bags 4 10 Oz 20 Oz 40 Oz Total Unit selling price 6 10 18 Unit Variable cost 4 7 13 Unit contribution Margin 2 3 5 Packaging Machine per bag 5 5 10 contribution margin per production bottleneck 0.4 0.6 0.5 Production qty 0 8640 0 Contribution 0 25920 0 25920 Fixed cost 3000 Net Income 22920 5 10 Oz 20 Oz 40 Oz Total Unit selling price 6 10 18 Unit Variable cost 4 7 13 Unit contribution Margin 2 3 5 Packaging Machine per bag 5 5 10 contribution margin per production bottleneck 0.4 0.6 0.5 Minimum Production 500 500 500 Machine seconds 2500 2500 5000 10000 Balance production 6640 33200 Optimal Production 500 7140 500 Contribution 1000 21420 2500 24920 Fixed cost 3000 Net Income 21920 If 500 - 10 Oz bags     1000 - 40 Oz bags 10 Oz 20 Oz 40 Oz Total Unit selling price 6 10 18 Unit Variable cost 4 7 13 Unit contribution Margin 2 3 5 Packaging Machine per bag 5 5 10 contribution margin per production bottleneck 0.4 0.6 0.5 Minimum Production 500 0 1000 43200 Machine seconds 2500 0 10000 12500 Balance production 6140 30700 Production 500 6140 1000 Contribution 1000 18420 5000 24420 Fixed cost 3000 Net Income 21420

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